Many individuals lack awareness about Joint Development Agreements (JDAs) and the corresponding GST implications. This article aims to elucidate the concept of JDAs and delve into the intricacies surrounding these agreements, providing a comprehensive understanding of their various aspects.
Introduction
A Joint Development Agreement (JDA) is a contractual arrangement involving a landowner and a builder/developer. In this agreement, the landowner contributes the land, while the developer assumes full responsibility for tasks such as obtaining approvals, construction, project launch, and marketing, often utilising their financial resources. Within every JDA, we typically encounter three distinct types of transactions:
Transfer of Development Rights:
In this transaction, the landowner transfers their development rights to the developer or builder in exchange for consideration. This consideration may be provided, wholly or partly, in the form of construction services related to complexes, buildings, or civil structures. This transaction is governed by Notification No. 4/2018 Central Tax (Rate) and Notification No. 3/2019 Central Tax (Rate).
Transfer of Construction Services:
The second transaction involves the developer or builder transferring construction services to the landowner in return for consideration. This consideration may be provided, either wholly or partly, in the form of transferring development rights. This transaction is also subject to the regulations outlined in Notification No. 4/2018 Central Tax (Rate) and Notification No. 3/2019 Central Tax (Rate).
Sale of the Developed area by Landowner and Developer:
Let’s discuss the scope of GST on joint development agreements for these three cases:
Transfer of Development Rights
In Context to Residential Property
Before March 2019:
In the scenario where the Joint Development Agreement (JDA) was entered into before March 31, 2019, the landowner is responsible for paying 18% GST. The calculation of the GST amount is based on Rule 27 of CGST Rules and Section 15 of the CGST Act of 2017. The tax should be paid on the date of the possession transfer of the constructed building.
For instance, if the property’s value is Rs. 15,00,000, the landowner would be liable for Rs. 270000(18% of Rs. 15,00,000) upon the property’s possession transfer.
After March 2019:
In cases where the JDA was executed on or after April 1, 2019, the responsibility for discharging GST falls on the developer through the reverse charge mechanism. The applicable GST rate is 1% for affordable housing and 5% for non-affordable housing.
The developer must pay GST on a reverse charge basis based on the value of the development rights of residential apartments. This calculation applies only to the apartments that remain unbooked on the date of either the completion certificate issuance or the first apartment’s occupancy, whichever occurs earlier.
To calculate the value, the formula is as follows:
Value = GST payable on developmental rights * carpet area of unbooked apartments as of the date of the completion certificate / total area of all apartments.
Furthermore, the payable tax should not exceed 0.5% or 2.5% of the value of the remaining unbooked apartments. This tax must be paid on the date of the first apartment’s occupation or the date of project completion, depending on which occurs first. For example, if the residential property is in the affordable category and valued at Rs. 60,000, the landowner would pay 1% GST, which amounts to Rs. 600, either when the completion certificate is issued or when the first apartment is occupied.
In context to Commercial Projects
When the landowner transfers development rights, they are required to pay 18% GST. The determination of the GST amount is based on the regulations outlined in CGST Rule 27 and Section 15 of the CGST Act.
For instance, if we consider a commercial building valued at Rs. 50,00,000, the landowner is obligated to pay 18% GST, amounting to Rs.900,000. It’s important to note that this GST rate remains consistent, regardless of whether the agreement was executed before or after March 2019.
Transfer of Construction Services:
In the context of residential projects:
Before March 2019:
Developers were subject to a 12% GST rate for this transaction. The GST amount was determined based on Section 15 of the CGST Act and CGST Rule 27. Under the old scheme, the GST rate remained at 12%. However, with the introduction of the new scheme, developers had to pay 1.5% GST for affordable housing or 7.5% for non-affordable housing. For instance, under the old scheme, a developer would pay 12% GST on a building valued at Rs. 6,00,000, amounting to Rs. 72,000.
On or after March 2019:
Developers are now liable to pay 1.5% GST for affordable properties or 7.5% for non-affordable properties. The GST is calculated based on the value of services, as determined by the amount charged by the independent buyer. The obligation to pay this tax arises on the first occupation of the project or the date of completion, whichever occurs earlier.
For example, in the case of a non-affordable property valued at Rs. 75,00,000, the developer is required to pay 7.5% GST, which equals Rs. 5,62,500.
In the context of Commercial Projects:
Before or after 2019:
Developers are obligated to pay 12% GST for the construction services they provide to the landowner. The valuation of this supply is determined by Section 15 of the CGST Act in conjunction with CGST Rule 27. This payment must be made on the date when possession is transferred through a conveyance deed.
After March 2019:
Developers continue to pay 12% GST, with the value of the service being calculated based on the amount charged to independent buyers nearest to the Joint Development Agreement (JDA). The payment liability arises on the date of the project’s first occupation or its completion, whichever occurs earlier. For instance, if the commercial property is valued at Rs. 100,00,000, developers would pay Rs. 12,00,000 in GST both before and after March 2019, with the specific GST amount varying according to the service’s value.
Normal Sale of Developed Area by the Landowner to Developer:
Before March 2019:
In this scenario, the transaction value is determined by Section 15 of the CGST Act 2017. The GST payment is due either upon the issuance of an invoice or the payment date, whichever comes first. The party involved is required to pay 12% GST based on the value of the supply.
After March 2019:
Similarly, the transaction value is determined by CGST Section 15. The GST rate is 1.5% for affordable properties, 7.5% for non-affordable properties, or 12% on the transaction value. The GST payment is due upon the issuance of an invoice or the payment date, whichever comes first. For instance, if the property is valued at Rs. 10,000, before March 2019, the landowner would have paid Rs. 1,200 in GST. However, after March 2019, if the property qualifies as affordable, they would only need to pay 1.5% GST, which amounts to Rs. 150.
Also, Read :
GST Implications On Labour Charges | HSN Code For Labour Charge
The Bottom Line
While Joint Development Agreements (JDAs) offer numerous advantages, it’s imperative to have a comprehensive understanding of all the intricacies related to JDAs, particularly regarding the applicable GST. CaptionBiz is your go-to destination for any assistance you may need regarding the implications of GST on JDAs. CaptainBiz provides a convenient solution for online GST billing software that helps you provide the same and also Provides simple invoicing, real-time inventory management, and cost reduction, allowing you to grow your business seamlessly.
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Frequently Asked Questions:
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What is the GST on the revenue sharing joint development agreement?
In the revenue sharing joint development agreement, the landowner provides land to the developer, and the developer’s responsibility is the construction and other development activities. Both parties enter into a sale agreement with the buyer in this case. Since the buyer receives the ultimate service, they are the one who pays GST. Currently, the GST rate is 1% or 5% after reducing one-third rebate in the element of land.
